2 Aug 2022
Sue-Ann Tan
Source: The Straits Times © SPH Media Limited. Permission required for reproduction
SINGAPORE - There is no change to the interest rates being paid out to Central Provident Fund (CPF) members, given that the current bank interest rates continue to be below the effective CPF floor rates, said Manpower Minister Tan See Leng in Parliament on Tuesday (Aug 2).
Responding to MPs' queries on whether CPF will increase its interest rate for the next few years to compensate for the high inflation rate environment, Dr Tan noted that the three-month average interest rate of three major local banks continues to be at around 0.09 per cent according to CPF's latest estimates, which is below the CPF Ordinary Accounts' (OA) interest rate of 2.5 per cent.
Meanwhile, the interest rate for the Special, MediSave and Retirement Accounts (SMRA) is pegged to the 12-month average yield of 10-year Singapore Government Securities plus 1 per cent. The peg was 2.72 per cent in May and around 3 per cent based on latest estimates, he said.
"As these are below the effective floor rates for these accounts, the interest rates for the OA and SMRA are maintained at 2.5 per cent and 4 per cent respectively," said Dr Tan.
He was responding to queries on CPF interest rates posed by MPs Henry Kwek (Kebun Baru) and Louis Chua (Sengkang GRC).
Asked how CPF computes its interest rates, Dr Tan said the rates are pegged to returns on investments of comparable risk and duration in the market.
For instance, members' OA savings are in a liquid account that can be withdrawn at any time for home purchases, servicing mortgage loans and investments.
"The OA interest rate is pegged to the three-month average fixed deposit and savings rates of our three major local banks which are DBS, UOB and OCBC," he said.
"These three banks have a larger share of domestic deposits than other banks."
For SMRA accounts, Dr Tan said the Government has maintained a floor rate of 4 per cent since 2008.
"Despite the low interest rate environment since the global financial crisis, the Government has continued to pay generous interest rates due to the floor rates," Dr Tan said.
"If the pegged rates exceed the floor rates, members will correspondingly earn the higher interest rates on their CPF savings."
CPF will continue to periodically review its interest rates, he added. In September, the CPF Board will announce the interest rates effective for the last three months of this year.
There is some time lag in CPF interest rate adjustments to avoid subjecting people to unnecessary fluctuations. Those with HDB concessionary loans who pay the prevailing OA interest rate plus 0.1 percentage point also benefit from the stability compared with market mortgage rates, he said.
To help boost retirement savings, the Government will continue to pay 1 per cent of extra interest on the first $60,000 of members' combined CPF balances as well as an additional 1 per cent on the first $30,000 of post-55 members' combined CPF balances, he added.
This means members below age 55 can earn up to 5 per cent, while members aged 55 and above can earn up to 6 per cent. People can also transfer their OA money to the Special or Retirement Account to earn the higher risk-free rate.
In a follow-up question, Mr Chua asked if CPF would consider granting extra interest and noted that local banks have raised interest rates for their savings accounts, such as for DBS' Multiplier account.
Dr Tan replied that the banks' interest rates and their fluctuations are "very short-term volatile instruments", while the CPF system takes a longer-term horizon to provide security in retirement with risk-free interest rates.
"The rates that are chosen are effective basic rates with no further conditions," Dr Tan said.
On the other hand, banks' promotional deposit rates are contingent on customers providing fresh funds, reaching a minimum spend on credit cards or other criteria, and are valid only for a limited period for a limited amount of deposits.
"In other words, as financial advisers, it behoves us to to actually be very transparent to all of our clients that these benefits are not uniformly applicable to all balances of all the depositors," he said.
Article was first published in The Straits Times on 2/8/2022